The Reserve Bank of India’s decision to allow Indian companies to hedge their gold price risk on recognised exchanges in the International Financial Services Centre (IFSC) will boost liquidity in bullion derivatives traded on BSE-promoted India International Exchange and NSE International Financial Service Centre.

The move will also bring down the cost of trading for exporters, and make them more competitive in the international markets.

Naveen Mathur, Director (Commodities & Currencies), Anand Rathi Share and Stock Brokers, said the RBI move will bring in the much-needed liquidity on the bullion exchanges at the IFSC.

It will also serve as the perfect risk mitigating tool for jewellery exporters as these contracts are dollar denominated, he added.  

Colin Shah, Managing Director, Kama Jewellery, said the RBI’s approval to hedge gold at IFSC will help gold importers and exporters using yellow metal as the primary raw material for production. This will also increase the price competitiveness of the Indian jewellery industry.

Exporters can hedge their positions against price fluctuations and unfavourable currency movement and will also lead to an increase in volumes and activities at IFSC, he added.

The RBI move to boost liquidity at IFSC will not have much impact on MCX, which attracts largest volume of derivatives trade in bullion.  

The most liquid MCX futures and options contract are suited for jewellers tapping the domestic market as it includes the impact of customs duty as these contracts are settled in physical delivery of goods unlike cash settled contracts in IFSC, said an analyst.

Moreover, he said the bullion contracts on MCX also covers the currency risk which is a major factor when dealing in bullion in the domestic market.

Jewellers also hedge their risk on inventory in ornaments form on the domestic derivatives market as they carry both currency and customs duty risks. Any cut in customs duty, leads to fall in gold and jewellery prices.

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